Guidance:
The SPX formed a black candle that retraced to the S1 level of Thursday's large white candle before closing at 1,089.41. The S2 level is 1,074.If support holds look for the support bounce to continue in the up coming week. If support breaks trade to the downside.

Stocks are mixed this morning on light volume in pre-market trading heading in to the three day Memorial Day weekend. Many short term traders don't like to carry long or short positions over long weekends. Look for trading to be lighter today and generally have smaller trading ranges. Perhaps a pause day after Thursday's strong move up.

Many traders will take off early on Friday or may take the entire day off.

Have a safe and enjoyable weekend.

Continue to Follow Your Rules.

Bonds are higher and TLT is up 46 cents in pre-market trading. Check out TBT.

A trader called me today and said that everyone he had heard recently was looking for the market to go down and that I was the only one who had been saying look for the market to rise. Why? Because I focus on the charts. I don't get subjective about the trading action, I look at what the chart is indicating every single day. I don't really care what the market is doing, I just want to observe what it is doing like a weatherman observes the weather.

I put what I observe on the line in writing and live in front of hundreds of traders every single trading day. It's not that I'm good, it's that are the technicals are the technicals only because they are the high probability outcome based on decades of observation. Most others just want to give into to their feelings until the herd moves and I just observe.

Another individual I know who in the last five trading days told me the market could drop to 900 was a born again bull after the 35 point rise. My point is not that people can change, rather it is that people won't look at the chart objectively until the herd moves first.

Dave's Insight:In the long run traders who can't think accurately several moves in advance are sooner or later destined to get trampled by the herd.

I hope you were objective about the MACD bullish divergence and the other positive technicals and took advantage of rising stocks at the right time. Did you notice that today's action was almost the exact inverse of last Thursday's action?

The SPX trader higher over night and US traders just kept buying all day long. NTAP reported stronger than expected earnings and raised their guidance, led the NASDAQ with a gain of +17.70%.

Dave's Insight: Continue to Follow Your Rules.

Guidance:
The SPX formed an large white shaven bottom candle that broke through the May 20 R1 level and closed above 1,100 and near the May 20 R2 level. The SPX closed 1,103 after rising 35 points.

Our Yellow Alert on the buy side turned green on Thursday. If you adjusted your stops according to your rules for down trending trades you may have been stopped out on Thursday.

Trade strong stocks up.

Trade weak stocks down.

The VIX fell -5.34 and closed at 29.68.

The short term trend is up.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend of the chart and follow your rules.

BMO – ES +23.75 and NQ +37.50 futures are higher in pre-market trading pointing to a higher above the 1,075 resistance and near 1,089 resistance. In pre-market trading AAPL is +5.50, AMZN +2.29, GOOG +9.78, BIDU +2.55, INTC is up 46 cents, BAC is up 41 cents and GS +2.45.

Most stocks are higher this morning on light volume in early pre-market trading on a support bounce continuation. If you have not been willing to believe the MACD bullish divergence get yourself objective and trade the charts signals and not your thoughts.

Part Deaux: Just a follow up comment from Wednesday night's post is I have heard several sources talking about a large head and shoulders on the chart with the recent April high being the head and some point a few days to a few weeks in the future being a right shoulder. None of those sources mentioned the MACD divergence, hammer, inverted hammer or 1,044 support level. I always suspect a forecaster that can see the future technical formation so well but can't see the current technical formations at all. Oh have I mentioned Dave' Insight? Trade the Market not your thoughts.

I'm not sure if it is more lonely seeing a MACD divergence or being a Maytag repairman?

Will they sell breaking 1,044 or see this as a buying opportunity? Apparently US trades saw the open around 1,044 on Tuesday as a buying opportunity, did you? Even though the markets sold off late Wednesday they sold off to a higher low are have rebounded over night. Are buyers coming in or are sellers making this market bounce?

Keep in mind that the intermediate term trend is neutral. What do neutral trends do at support?

If you have been trading with the short term trend you are already on trading to the downside, it is now time to make sure you are exiting these trades when the charts and your rules tell you to. Trade with the short term trend reversal and continue to move your stops.

Continue to Follow Your Rules.Bonds are lower and TLT is down $1.13 cents in pre-market trading. Check out TBT.

On Tuesday the SPX opened lower and moved lower and then moved higher from its open. Wednesday the SPX opened higher and moved higher and then closed lower than its open. I couldn't ask for better real time proof of my Monday statement about overnight futures predicting the next day's close no better than a coin toss.

If you are reading this I hope you can look at an SPX chart and recognize that Tuesday was a long tailed hammer, that Wednesday is an inverted hammer and made a higher low and a higher high. Objectively the hammer, inverted hammer and higher low and high are all bullish characteristics. Also advancing issues led declining issues on both the NYSE and NASDAQ.

The technical evidence does not mean that the market is going up with certainty which is of course why good technical traders trade with stops. It only means that the technical probabilities suggest that this support area is more likely to result in a bounce than a break.

I am considering creating a new indicator and thinking of calling it the Balderdash, Bogus or Noise Index.Why? Because every time the market gets into a key pivot area, sources begin generating Balderdash, their Bogus opinions of the future or just creating Noise that ignores the objective technical analysis on the chart.

Get me right on thisI think you should follow your trading rules every single day,whether the market is moving up, down or sideways and whether it is at support, resistance or in between. I don't think a trader should look at the chart objectively some days and subjectively othersdepending on how loud the Balderdash, Bogus or Noise Index is. Empirically, experience suggests that this Noise or lack of objectivty increases the bounce probability.

Right now I am NOT hearing sources talk about a hammer, an inverted hammer, a bounce off 1,044 support, a bullish MACD divergence and a higher low and higher high. Rather I am hearing exactly the same kind of Noise I heard last July and in February suggesting that the market could go lower. Of course it could. It could go lower every single trading day and does in fact go lower from some level at least temporarily every single day.

What will smart traders do?Ignore the noise follow their rules, set their stops and trade the technical probabilities. And yes, if the lower probability break occurs they will trade it when it happens.

On Monday night I pointed out that the February low MACD bullish divergence consolidated for five days before the SPX had strong upward momentum. So now you take a look at the SPX chart from last July, February and today...then make your decision based on your rules.

Look at these Charts

(click image to enlarge)

Dave's Insight: Trade the Market not your thoughts.

Guidance:
The SPX formed an inverted hammer candle that did not confirm Tuesday's long tailed hammer so we will wait for potential confirmation on Thursday. The bullish MACD divergence is still valid. The SPX hit 1,090 before pulling back 23 points closing at 1,067.

We continue our Yellow Alert on the buy side and potential exit for short term bearish trades. Tuesday was the low day on many charts and continued upward momentum on Thursday could break the high of the low day and be a new entry for bullish trades and exit for bearish trades. Adjust your stops according to your rules for down trending trades.

Trade strong stocks up.

Trade weak stocks down.

The VIX rose +0.41 and closed at 35.02.

The four day trend is neutral.The four week trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend of the chart and follow your rules.

Dave will be in meeting this morning and will have a sub in AT capstone and VC options. I'll see you live on Thursday morning and evening...

BMO – ES +8.00 and NQ +12.75 futures are higher in pre-market trading pointing to a higher open near 1,044 support area. In pre-market trading AAPL is +4.48, AMZN +0.52, GOOG +5.07, BIDU +2.25, INTC is up 25 cents, BAC is up 39 cents and GS +1.91.

Most stocks are higher this morning on moderate volume in pre-market trading on a support bounce continuation. If you have not been willing to believe the MACD bullish divergence get yourself objective and trade the charts signals and not your thoughts.

Will they sell breaking 1,044 or see this as a buying opportunity? Apparently US traders saw the open around 1,044 on Tuesday as a buying opportunity, did you?

The typical technical bounce did occur yesterday and pre-market trading is continuing that bounce. Keep in mind that the intermediate term trend is neutral. What do neutral trends do at support?

If you have been trading with the short term trend you are already on trading to the downside, it is now time to make sure you are exiting these trades when the charts and your rules tell you to. Trade with the short term trend reversal and continue to move your stops.

Continue to Follow Your Rules.

Bonds are lower and TLT is down 57 cents in pre-market trading. Check out TBT.

Four of nine sectors moved higher on Tuesday. Materials, Consumer Discretionary, Financials and Energy were stronger than the SPX +0.04%.

I pointed out the MACD divergence last Wednesday in the AT Workshop in Long Beach, Thursday in the AI Talk, Friday in the Weekly Wrap, Monday in the AT webcast and Tuesday in virtual coaching. In those five events approximately 3,200 people collectively heard me share the technical evidence. I think a few people actually believed me.

Monday evening, to over 600 traders, I explained how the the July and February divergences took three to five days to gain upward momentum and that yesterday was only day one. I also explained that overnight futures don't predict beyond a coin toss how the US markets will close. I'm not sure if anyone actually believed what I was saying on the futures.

Well I was put to the test today when the SP futures opened 24.50 points lower. I suspect more than one of the 600 plus traders where thinking, “I knew Dave didn't know what he was talking about.” Well by the end of the day those same SP futures closed two points higher than Monday's close.

When it comes to trading I teach what I know is real based on experience. I don't teach what someone else said or what I read in a book. So I suspect at the end of the day there were probably two more believers in what I taught last night than there was at the beginning of the day.

OMG, did you see the hammers on the SPX, INDU and RUT today. Does this look like what I have been teaching for years? Some of you will remember the long tailed hammer I pointed out live on Thursday June 8, 2006 as the support area low at that time.

Look at these Charts

(click image to enlarge)

Remember technical analysis is based on probabilities not certainties and the MACD divergence has been telling us the probability is that this pull back is near a low.

In addition to the long tailed hammer did you see the bullish engulfing patterns and piercing line patterns in large numbers today? Many of these individual charts are also showing MACD bullish divergences. And yes there are a few bull flags out there too.

Look at these Charts

(click image to enlarge)

Dave's Insight: Continue to Follow Your Rules.

Guidance:
The SPX formed a long tailed hammer candle very similar to the one on February 8 and last July 8 at the bottom of the two prior bullish MACD divergence. The SPX hit 1,040.78 before rising almost 34 points closing at 1,074.

Yellow Alert on the buy side and potential exit for short term bearish trades. Tuesday was the low day on many charts and continued upward momentum on Wednesdaycould break the high of the low day and be a new entry for bullish trades and exit for bearish trades. Adjust your stops according to your rules for down trending trades.

Trade strong stocks up.

Trade weak stocks down.

The VIX fell -3.71 and closed at 34.61.

The short term trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend of the chart and follow your rules.

BMO – ES -27.50 and NQ -41.50 futures are lower in pre-market trading pointing to a lower open near 1,044 support area. In pre-market trading AAPL is -6.82, AMZN -3.32, GOOG -9.16, BIDU -3.10, INTC is down 52 cents, BAC is down 47 cents and GS -2.32.

Most stocks are lower this morning on moderate volume in pre-market trading with the European debt concerns continuing to drive prices lower.

It appears the SPX will make a recent lower low and open near its February 8 support level. It would be typical to have a technical bounce, but we have to wait and see what US traders do at the cash open. Will they sell breaking 1,044 or see this as a buying opportunity?

If a technical bounce does not occur and prices break 1,044 support look to the next support level at 1,033.

If you have been trading with the short term trend you are already on trading to the downside. Continue trading with the trend and continue to move your stops.

The SPX failed to break Thursday's R1 resistance at 1,089 for the second straight trading day. Monday's pull back sets up a test of last Friday's low of 1,055. If that support is broken on Tuesday look for prices to fall to the 1,044 level.

As of Monday's close the SPX MACD Divergence is still valid so we are still prepared for support to hold and traders should continue to trade down trending charts down. NDX stocks including AAPL, GOOG, BIDU and QCOM sold off from their earlier highs. Even up trending stocks formed potential high days on Monday, so be willing to raise stops if prices move lower on Tuesday as I discussed in Monday evening's webcast.

Guidance:

The SPX formed a large black candle reversing half of Friday's piercing line candle. Watch Friday's 1,055 support low for a potential break.

Trade weak stocks down. Continue to trade the bounce off resistance and a break of support to the next support level.

Trade strong stocks up. We saw some entry signals on Friday with the support bounce. Early Monday a support bounce continuation move did occur until about 1 pm but failed to stay above Thursday's R1 at 1,089 . The last three hours of trading saw prices move lower towards support.

The VIX fell -1.78 and closed at 38.32. On Thursday the VIX made it highest close since March 20, 2009.

The short term trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend and follow your rules.

Adjust your stops according to your rules for up and down trending trades.

Don points out in the Comments area that he is seeing a lot of potential double bottoms. These are of course potential short term double bottoms following the recent 165 SPX point pull back. If the SPX is forming a potential double bottom and MACD bullish divergence then you would expect to see a simalar pattern on a large number of charts.

Remember an average is a compilation of the stocks in that average. In other words we could say that right now on average (SPX) stocks are forming a potential double bottom with a bullish divergence. Of course there are leading stocks, those stronger than average like BIDU, NFLX, AKAM and SNDK; there are coincident stocks those forming the potential double bottom with bullish divergence; there are lagging stocks that are forming lower lows like PCLN, POT, MOS, AGU and MON.

With the 32 point rally off the SPX low on Friday, we will look for a potential support bounce continuation this morning. The SPX paused at Thursday's R1, the 1,089 level, so watch that key area of short term resistance. Look for strong stocks to continue to bounce in their bull flag pattern.

Continue to Follow Your Rules.

Bonds are flat and TLT is up 8 cents in pre-market trading.

The short term trend is down, the intermediate term trend is neutral and long term trend is up.

Trade those charts that meet your rules in the direction of the trend.

The Euro is down 158 pips in overnight trading.

SPY is down 44 cents and XLF is up 14 cents in pre-market trading. Watch XLF as a key to any sustained move in the SPX.

From its Friday May 14 close of 1,135, the SPX fell 80 points to its 1,055 early Friday morning low and then rallied 32 points on strong buying to close at 1,087. The SPX was down 48 points or -4.2% for the week.

Look at these Charts

(click image to enlarge)

Thursday night in the Talk I spoke about the importance of being contrary at turning points in the market not all the time. I reminded everyone of a the bearish harami and our Yellow Alert last Thursday and the ensuing down move.

Now the technical evidence, a MACD bullish divergence at support was suggesting the possibility of a move up. Friday delivered at least the first up day. While the future may be nothing like the past, the SPX moves in July and February after the last two bullish divergences suggest it would be unwise to ignore the bullish divergence like most traders did last July and February. Go back an read our prior posts if you have forgotten what we wrote in July and February.

Look at this Chart

(click image to enlarge)

I also spent a good part of the Talk Thursday teaching listeners to find the stronger up trending stocks and then detailed exactly to the penny how to determine an entry point, a stop and a target one and two for the trade. I illustrated the concept on BIDU in the real time virtual account. That trade filled on Friday as BIDU did bounce.

I also suggested several other stocks that would fit the pattern. I also listed "Setups for flag bounce: BIDU, WFMI, NFLX, NTRI, HANS" in Thursday night's post.

Look at these Charts

(click image to enlarge)

Dave's Insight: Continue to Follow Your Rules.

Guidance:
The SPX formed a piercing line candle on Friday with a support bounce rising to Thursday's R1 level. Friday's 32 point rally from 1,055 indicates that buying is strong at this key horizontal support level.

Trade weak stocks down. Continue to trade the bounce off resistance and a break of support to the next support level.

Trade strong stocks up. We saw some entry signals on Friday with the support bounce. We will look for additional entry signals on Monday and a potential support bounce continuation move. We will look for a break of Thursday's 1,089 R1 level as evidence of a support bounce continuation.

The VIX fell -5.69 and closed at 40.10. On Thursday the VIX made it highest close since March 20, 2009.

The short term trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend and follow your rules.

Adjust your stops according to your rules for up and down trending trades.

BMO – ES -9.50 and NQ -18.75 futures are lower in pre-market trading pointing to a lower open after the senate passed the financial reform bill on Thursday. In pre-market trading AAPL is -2.51, AMZN -0.41, GOOG -2.41, BIDU -0.98, INTC is down 36 cents, BAC is down 21 cents and GS +0.46.

More stocks are lower this morning than higher on light volume in pre-market trading. Financials XLF is lower on heavy pre-market volume. Other sectors are lower also but on light volume. If support breaks look for price to fall to the next support level.

Volatility increased on Thursday and is poised to rise again this morning. Higher volatility means you should continue to expect bigger and quicker moves both up and down.

Continue to Follow Your Rules. If you are looking for a potential support bounce in strong stocks like BIDU, WFMI, NFLX, NTRI and HANS continue to wait for the bounce. Continue to trade weak stocks down.

We alerted you last Thursday to the bearish in the four broad indexes last Thursday which was confirmed on Friday. In the last five trading days the INDU dropped 714 points and the SPX dropped 86 points.

Our Yellow Alert last Thursday, which turned red last Friday gave traders the heads up necessary to profit from drop of the last five days. The markets have broke several support levels this past week to return to its mini-crash lows from two weeks ago.

The SPX is forming a potential double bottom and potential bullish divergence similar to last July and February.

We will continue to stay focused on the short term down trend and stay alert for a potential support bounce.

You might also notice that all but three of our watch list stocks have fallen below their 30 DMA as of today.

Setups for flag bounce: BIDU, WFMI, NFLX, NTRI, HANS

Setups for break of support: FCX, JEC, MCD, DECK, SWK, CAT, BA, ATI

Guidance:
The SPX continued to sell off on Thursday reaching 1,071.

If the 1,065 low of two weeks ago is broken look for a move to 1,045, the January February correction low. The mid section, 1,089, of Thursday's large black candle on the SPX is R1 short term resistance.

Trade weak stocks down. Numerous stocks broke another level of horizontal support on Thursday. Continue to trade the bounce off resistance and a break of support to the next support level.

Trade strong stocks up. Look for entry signals only on a support bounce on Friday. If a bounce does not occur stand aside until a bounce does happen. There have been very few support bounces this week, so our guidance to stand aside on these trades until they occur may have helped you use correct trade logic.

The VIX rose +10.47 and closed at 45.79. The VIX made it highest close since March 20, 2009.

The short term trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend and follow your rules.

Adjust your stops according to your rules for up and down trending trades.

Guidance:
The SPX opened lower and sold off to 1,100.55 just before noon in a test of the 1,094 low on Friday, May 7. Buyers stepped just above the May 7 low during the afternoon and the SPX rallied to a 1,115.05 close.

SPX consolidation continues with a bounce off of the 1,100 support area. With a combination of a potential double bottom and bullish MACD divergencelook for potential confirmation of the hammer candle pattern and a bullish divergence entry signal.

Trade strong stocks up. Few stocks are maintaining their up trend.

Trade down trending stocks down as they pull back from resistance or break through support.

The VIX rose +1.77 and closed at 35.22.

The short term trend is down.The six-month trend is neutral.The twelve-month trend is up.

Continue to focus on and trade setups on the charts of the stocks you watch, trade with the trend and follow your rules.

Adjust your stops according to your rules for up and down trending trades.

HANS is upgraded to Buy at GS. X is bouncing this morning. CREE broke the high of the low day yesterday. AKAM had a horizontal breakout on Monday. NFLX broke the high of the low day on Monday. SBUX is poised to break the high of the low day this morning.

Stocks are broadly higher this morning with advancers leading decliners in pre-market trading on moderate volume being led by Energy XLE, Financials XLF and Technology XLK.

After testing last Monday's opening level yesterday the SPX rallied 21 points to close at 1,136.94. If Monday's support continues after the open look for it to move to the 1,145 resistance. If that is broken next resistance is 1,155. Last week's high is 1,173.

If trading continues to the upside at the cash open look for volatility to move lower. We will continue to watch for volatility to move toward and below 25 for indication that the recent consolidation pattern is ready to shift back into an intermediate term up trend.

Stocks are near even this morning with a similar number of advancers and decliners in pre-market trading on moderate volume. We will watch for either continuation or failure of the support bounce that started in the last hour of trading on Friday. If it fails watch for a test of Friday's low. If the support bounce continues watch for a move to 1,145.

Volatility moved higher and closed a 31 on Friday. Higher volatility means you should continue to expect bigger and quicker moves both up and down. We continue to watch whether volatility moves toward and below 25.

Dave Johnson, CMT

David Johnson, CMT
Investment professional for 40 years including analyst, portfolio manager, trader and trading instructor. Performing computer based technical analysis since 1990. Previously quantitative and fundamental analysis. Has trained more than 40,000 traders in over 250 events including two and four day training events.
Email: chartsignals@yahoo.com